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Sebi’s proposal ensures equal treatment, will boost confidence: Experts

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Voting rights to minority unit holders in REITs/​InvITs

The Securities and Exchange Board of India’s proposal to extend voting rights to minority unitholders with at least 10% holding in a REIT or InvIT will not just build confidence but also ensure equal treatment, feel experts.

The regulator has invited comments for the consultation process until May 29.

“The idea of having a nominee director on the boards of REITs and InvITs would be attractive to institutional players with minority stakes. It gives them more influence in decision-making and could reduce shareholder and legal conflicts as seen recently in public companies and mutual funds,” said Sumit Agrawal, founder of Regstreet Law Advisors.

“The proposal shows a commitment to empowering investors and enhancing transparency. Sebi should also consider ease of business and minority influence when setting appointment thresholds,” he added.

Present norms do not allow for superior voting rights to any unitholder but Sebi has observed special/differential rights (to nominate members to the board) being granted to certain unitholders by way of a trust deed or offer document/placement memorandum.

They were done citing the large-ticket size of investment and the need to exercise control.

To ensure equality in rights, Sebi has called for such privileges to be extended to other investors, providing two options. One is to allow investors to nominate directors on the board of the manager or investment manager for every 10% of the units they own. The other is to allow them to nominate a member to the Unitholders’ Council for every 10% of the units held.

It has proposed allowing unit holders with less than 10% holding to come together and vote collectively if their cumulative holding surpasses 10%.

Pointing out that the first option may lead to inflated boards, the regulator has recommended the second option as an alternative.

“Considering that minority unitholders were not getting a say till now, this comes as a welcome move. Voting rights for those with at least 10% holding is a step to give them a voice. However, it is possible for larger investors to feel some discomfort, which could at times lead to certain conflicts during a sell-off or passing of a resolution,” said Niranjan Hiranandani, co-founder and managing director of Hiranandani Group.

Recognising the possibility of such conflicts, the regulator has sought to make the Stewardship Code applicable to such trusts, in line with those for mutual funds (MFs) and alternative investment funds (AIFs).

Stewardship responsibilities of institutional investors involve higher monitoring and engagement with investment entities to protect clients’ wealth. The regulator has proposed that such a policy be applicable to members on the board of investment managers of such entities and for them to have a clear policy to manage conflicts as well as to collaborate with other institutional investors to protect the interest of unit holders.

“Extending the scope of the Stewardship Code to sponsors is a confidence-building measure for the market, as protecting the interests of smaller shareholders is also important,” said Niraj Kumar, partner at DSK Legal. He added that larger investors should have more skin in the game to ensure efficiency in operations.

Agrees Agrawal, saying that the Stewardship Code is a measure that will only serve to enhance governance standards among REITs/InvITs.